Implications

The practical implications of this research are concerned with the applicability of the conceptual framework in the context of Dutch technological companies. For these companies, the international outsourcing framework offers a means to make rational decisions concerning outsourcing (part of) manufacturing to international suppliers. Accordingly, managers should take into account the different theories and the associated factors, which will help them during their assessment of the internal and external environment of their company. This will ultimately determine if the company can create value through outsourcing, what products can be outsourced and to which location. Transferring (part of) manufacturing to

INTERNATIONAL OUTSOURCING DECISION

INTERNAL FACTORS EXTERNAL FACTORS

MOTIVES

 Cost savings

 Make manufacturing capacity more flexible by increasing/decreasing when necessary

 Focus on core competences of the company

 Gain flexibility

o Turn fixed company costs into variable purchasing costs

o Spread risks

o Access to skilled (technological) labour

o To reduce capital invested in machines

Access to superior resources, knowledge and innovations

LOCATION FACTORS

 Labour costs

 Available machines, equipment and materials

 Technological knowhow and competences of workforce

 Workforce size and availability

 Total costs of transportation

 Legalisation and enforcement

 Stability of country

 Language

 Inflation and currency risks

o Protection of Intellectual Property

o Presence and quality of road, rails (air)ports

o Physical distance

o Leading industries of that country Welfare level of a country

Presence of natural resources; continuity of electricity ENVIRONMENTAL UNCERTAINTY  Demand uncertainty o Technological uncertainty PROXIMITY  Knowledge proximity  Cultural proximity  Relational proximity ? Physical proximity ? Institutional proximity FREQUENCY  Long-term relation Short-term relation EXPERIENCE

International outsourcing experience International business experience PRODUCT FACTORS

 Physical asset specificity

 Human asset specificity

 Knowledge specificity

 Strategic value of resources and knowledge

international suppliers can be a viable option which needs due consideration. Based on this research, the following recommendations are made:

- Focus on what you do best; identify the core competences of your company that provide value to customers and differentiates your company from competitors. These strategically important and often knowledge-intensive resources and capabilities are a source of competitive advantage. Invest in developing them so that you can stay ahead of competition. For most Dutch technological companies this means that they have to keep R&D, Design and Engineering in-house.

- Outsource supplementary activities to the best suppliers in the world; by outsourcing these activities to LCCs, your company is able to sustain its market position, because it can compete with competitive prices despite global price pressures. The conditions to perform these non-strategic and often labour-intensive processes are most beneficial in these countries since they enjoy cost advantages like lower employment - and (raw)material costs. For most Dutch technological companies this means that they have to transfer the Manufacturing of components or loose parts to excellent suppliers.

- When you want to gain flexibility or turn fixed company costs into variable procurement costs, engage in international outsourcing. International outsourcing can offer these substantial advantages, because it allows you to expand manufacturing capacity without having to make heavy investments. Moreover, by creating a focused organization, your company is better able to adapt to changes in customer preferences, rules and regulations or (technological) innovations.

- The advantages of international outsourcing are best realized by outsourcing components, which can be manufactured with standardized machines and equipment or non-specialized skills and experiences of employees. Companies can outsource components for which more specialized assets are needed, but you have to take into account that this is more challenging since the number of suppliers in the market that already have these assets or are wanting to invest in them is much smaller. In addition, it might be more expensive since search and information costs will rise and the risks of the supplier asking exorbitant prices increases. Especially in this situation, it is important to engage in long-term relations since switching costs are high and the increased trust, commitment and routines between the company and the supplier will help to avoid the potential difficulties. Overall, it is important to have clear component specifications and that you explain with 100% accuracy what you want from the supplier. - Take the following factors into consideration when determining to which country (or supplier) your

company is going to outsource manufacturing: low labour costs; advanced machines, equipment and materials; excellent technological knowhow and competences of the workforce; workforce is sufficiently large; total costs of transportation; established legal system and enforcement; stable country (politics); and the languages spoken by management and lower level employees. Do your homework and find out if these factors are present in that country and if a particular supplier meets these conditions. This is important for your company in order to keep quality standards high and make outsourcing successful. Moreover, the results of this research provide input for the FME to adapt and to further develop their international outsourcing services. Next to structurally informing and educating their members on the rationale and conditions that make outsourcing a viable option, they need to fulfil an intermediary role by helping companies to find reliable suppliers in foreign locations. This can be by means of a platform for exchange of information (18,7%), matchmaking (14,9%) or outgoing outsourcing missions to for example Eastern Europe (11,9%) or China (7,5%). When organising outgoing outsourcing missions or associated matchmaking events between companies and international suppliers, it is important that the FME takes into account the importance of the different location factors. Outsourcing missions to countries of which suppliers in general have advanced machineries; the workforce is sufficiently large and technically skilled; and labour costs are low, fit the conditions of making outsourcing a viable option for their members.

The theoretical implications of this research are concerned with the insights gained regarding the applicability of the TCT, RBV, OT, KBV and LT in the context of Dutch technological companies. Although future research is needed, the results of the qualitative and quantitative research provided useful insights concerning the

relevance and usability of these theories. This modest research contributed to our understanding of international outsourcing from the perspective of these companies. However, the results should be interpreted with caution. The different theories will now be evaluated in light of what is found by means in this research. First, the TCT can still be seen as a predominant explanation of international outsourcing. Companies still embrace outsourcing as a means to become more cost efficient. However, this is not solely done in order to maximize profits, but is seen as a necessary means to remain competitive in this globalized world. Manufacturing is outsourced because the cost of manufacturing these products is lower when foreign suppliers perform this activity compared to in-house manufacturing. This is due to suppliers having cost advantages like low labour costs and low costs of (raw) materials plus they might have access to cost drivers like economies of scale. Therefore, outsourcing is often seen as the most cost efficient option for the company. Regarding asset specificity it can be said that the findings of this research are in line with was expected according to theory. Products which require high asset specific investments reduce the degree of practising outsourcing. Although most companies outsource products or components which are characterized by low asset specificity, there is also a substantial amount of companies which outsource products or components for which specialized machines and equipment or specialized skills and experience is needed. However, these high asset specific components can only be outsourced on one of the two conditions: (1) high volumes need to be manufactured, or (2) there are suppliers in the market that already have these specialized machines up and running or have employers administering the required skills. When this is not the case, in-house manufacturing is preferred. The limitations do not apply to outsourcing components of low asset specificity since these can be manufactured by multiple players in the market. Regarding uncertainty, theory predicted that demand uncertainty will not necessitate in-house manufacturing, except when asset specificity is high. However, somewhat differing findings our found in this research. Based on the quantitative and qualitative research, it can be said that volatility of sales volume is reason to engage in outsourcing. Companies prefer being flexible in adjusting manufacturing capacity to relative demand. Advantage is that the companies no longer have to deal with hiring/firing employees and don’t have to build a new plant. So it can be assumed that demand uncertainty positively influences the decision to outsource internationally. In addition, no noteworthy differences are found between the influence of low - versus high asset specificity on the motive of making manufacturing capacity more flexible by increasing/decreasing it when necessary. Regarding technological uncertainty, theory states that high asset specificity in combination with high technological uncertainty will lead to outsourcing. Although the importance of the motive of ´reducing capital invested in machines´ increased from an average of 4,2 for low physical asset specificity to a 5,3 for high asset specificity, the motive is ranked on a middling level indicating that it is not a key motivation to engage in international outsourcing. The same holds for the results of low – and high human asset specificity which were both ranked by a 4,7. Based on these results, no clear statements can be made concerning the influence of technological uncertainty on the outsourcing decision. Regarding frequency, the results of the qualitative research confirm what was expected according to theory. Most companies frequently transfer activities to the same supplier. They prefer long term relations for the reasons indicated in literature, namely: inter-firm routines, develop a mutual knowledge and build a trustful relation. This is especially the case for products or components that require investments in specific assets. The results also confirm that standardized components do not necessarily need to outsourced to a supplier with which the company has a long-term relation. In sum, applying the TCT to Dutch technological companies results in a confirmation of companies seeking to minimize costs by choosing the most efficient option of supplying products to its customers. Outsourcing prevails when asset specificity is low. Components for which specific assets are needed, will only be outsourced by means of relational contracts. Opposing from what was expected, technological uncertainty doesn’t seem to be a determining factor in the outsourcing decision. So technological volatility in combination with high asset specificity does not directly lead to companies outsourcing that component. Components of high asset specificity are mainly kept in-house because suppliers are reluctant to invest in these specific machines especially not if the supplier cannot earn back its invested capital because of low volume orders. High demand uncertainty in combination with low – and high asset specificity leads to outsourcing manufacturing. Therefore, for the TCT, the predictions

regarding demand uncertainty need to be adjusted and highlighted since it does lead to outsourcing manufacturing. The role of asset specificity need to be nuanced, since the characteristics of high versus low asset specificity need to be considered in relation to the consequences (e.g. difficult to find supplier, long-term relation etc.) but it is not a determining factor in that both can be outsourced in practice. Based on this research, the factor technological uncertainty doesn’t seem to be an important external factor, but further research is needed.

Second, the RBV is also a relevant theory in explaining international outsourcing in the context of Dutch technological companies. The manufacturing processes or components for which strategic assets are needed are kept in-house. So it does confirm this theory in the way that companies mainly outsource the processes or components for which there is no strategic need to internally manufacture it. Companies focus on the strategic resources that lead to superior performance. Although companies acknowledge the sub factors ‘value’ and ‘scarcity’ as being indicators of strategic value, they mention that ‘non-substitutability’ and ‘in-imitable’ are not relevant since everything can be copied. This is mainly based on the what companies explained during the qualitative research. In order to stay competitive, companies have to keep developing (innovative) versions of the component or improve the process. They agree that time and competition can diminish the value of these resources and capabilities. Concentrating a companies’ resources on core competences and outsource other activities is perceived as being an important motive for companies to engage in outsourcing. However, the RBV also states that companies outsource to add value to strategically important organisational processes of which they lack the resources, skills or competences. This does not seem to apply to technological companies in the Netherlands. Most companies do not outsource to gain access to resources, technologies and innovations. Nor do they use outsourcing as a means to counteract their lack of (technological) labour. Whether this is due to companies not lacking these resources or that they solve this problem in another way is not clear. The companies which is spoken to during the interviews, indicated that they don´t have difficulties with finding capable, technical employees. In sum, based on this research, changes to the RBV can be made by deleting the sub factors ‘in-imitable’ and ‘non-substitutability’ since these don’t seem to be indicators of strategic value plus it is founded that international outsourcing is not a viable means to get access to superior resources, knowledge and innovations that a company may lack.

The OT theory indicated that from the year 2000 onwards companies outsource to develop a new adaptive business model. It can be said that companies have transformed their business into a more flexible design by outsourcing manufacturing processes to international suppliers. By focusing on less but manageable activities the company can adapt more easily to changes in the environment. Although flexibility is rated as being an important motive, the progressive state of a virtual company in which most of the key activities are outsourced to distinct but world-class suppliers is not reached nor envisioned. Companies want to keep their key manufacturing processes in-house, because they see it as a source of their distinguishing capacity. International outsourcing is merely seen as a means to be strategically flexible, adapt to changes in demand and create value and cost reductions by outsourcing to suppliers that can develop and manufacture these products more effectively. Maybe in the future companies will outsource more knowledge-intensive and creative processes like R&D and Development, but nowadays only a few companies outsource these processes. In sum, regarding the OT, the results of this research confirm the basic underlying of this theory of companies wanting to improve their competitiveness by transforming into a flexible entity, but it does not relate to the advanced state of outsourcing most key activities. So flexibility is important, but the way companies meet this goal is different and not that far-reaching as is stated in this theory.

Regarding the KBV, this research confirms what was expected according to theory. Companies don’t outsource manufacturing processes or components which are based on strategic knowledge since it will jeopardize the current and future competitive advantage of the company. Mature and specific knowledge underlying a process or component is outsourced, because it is standardized and relatively easy to transfer to the supplier. For transferability purposes, it is perceived as beneficial when the company and the supplier have long-term positive outsourcing relations; the employers of both the company and the supplier can communicate in a

common language; and the supplier administers the technological knowhow and competences needed for manufacturing the product. Concerning the experience factor, the results of the qualitative research show that previous international outsourcing or international business experience is by some companies perceived as being beneficial, but it is not seen as a determining factor in the outsourcing decision nor is it decisive in the selection of an outsourcing location. In sum, regarding the KBV, the factor experience can be removed since it is not an important factor that needs to be considered in outsourcing decision making. The importance of strategic value needs to be highlighted. For knowledge specificity the consequences of transferring explicit versus tacit knowledge are important since both can be implemented in practice, but explicit knowledge is easier and less costly. The role of proximity in outsourcing decision making, needs further research.

Regarding the LT, this research confirms that companies select locations that are beneficial and increases their profits. Theory described a multitude of environmental factor that affect international business in general, and of which it was expected to influence international outsourcing as well. According to this research, important factors in choosing an location for outsourcing manufacturing are: labour costs; available machines, equipment and materials; technological knowhow and competences of workforce; workforce size and availability; total costs of transportation; legalisation and enforcement (customs, corruption, free trade); stability of country (politics, strikes); and language. Based on this research, the LT can be further developed since no previous studies were found in which the LT was applied to international outsourcing. By incorporating these particular location factors, the theory is more suitable for deciding whether the company should outsource manufacturing processes and to international suppliers.